THE TRUTH ABOUT INTRADE: Why You Should Totally Ignore It During The Election

As the election heats up, politics wonks who want a little more
statistical meat than just poll numbers turn to InTrade to get the betting odds
various candidates.

InTrade is an Ireland-based event/prediction market that works
like this: There are various binary questions that are asked,
such as "WILL HERMAN CAIN BE THE GOP NOMINEE?" or "WILL ISRAEL
DROP A BOMB ON IRAN BEFORE DECEMBER 31, 2012?".

Each contract expires at $10 (if the answer turns out to be YES)
or $0 if the answer turns out to be no.

So if you think that Herman Cain is going to be the nominee, then
you can buy one
Herman Cain contract for $0.42, and make nearly 25x on your
money if it expires at $10.

Right now, as you can see, the "market" isn't very bullish on
Cain's chances, and it seems the bettors on the site are fully on
board team Romney, whose
contract is trading over $7, meaning you have pretty limited
upside at this point.

Got it? Okay.

Now the reason people like InTrade is that people are putting
money where their mouths are (always popular) and it combines the
wisdom of crowds (also a super-trendy concept, though perhaps a
bit less so post-2008 crash, when the un-wisdom of crowds became
the new hot meme). There have been a number of
economists/academics (like Robin Hanson) who think that
prediction markets of various stripes hold great promise in
garnering information that could be valuable.

So why ignore InTrade? Well, basically, because all it
does is distill conventional wisdom. Seriously, what
good is it to know that on InTrade Mitt Romney is far ahead, and that Hermain Cain
doesn't have a chance? All you have to do is read any DC-based
political pundit, and they'll tell you the exact same thing.

And when the conventional wisdom changes, so does the market.

Rick Perry is down in the dumps on
InTrade now, but back in August -- when everyone was talking
about how he was the frontrunner -- he was the frontrunner on
InTrade as well.

Basically his contract was nowhere until people started talking
about him entering the race, then it jumped as it became more
likely he would enter, then it surged when the polls had him
winning, and then it collapsed when his poll support collapsed,
and all the politicos wrote him off. There's nothing predictive
or insightful in here

And that's exactly why you should ignore InTrade this year:
Because by looking at it you might think you're getting fresh
insight into the data or more information somehow, but what
you're really getting is a different way of seeing the same
mainstream groupthink that you could get anywhere else. That's
very dangerous.

Because the conventional wisdom on something like this is so hard
to come by (you don't hear people making solid predictions on
this left and right like in the presidential election) it could
be a useful tool for figuring out what people "in the know"
actually think. Unfortunately in this case, the volume is so
light (in part thanks to the fact that it's very hard for people
in the US to get money into the site due to gambling
restrictions) that you want to tread very carefully.

So we're all for betting markets on all kinds of things,
especially when they combine speculators and smart money and
everyone else.

But this election season recognize that when you're looking at
InTrade, you're not getting some additional insight: Just the
same conventional wisdom that thought Rick Perry was going to
win, that thought Newt was dead in the water this summer, and
that barely even heard of Herman Cain a few months ago.